Questions


1) What is a Forward ?
An agreement to buy (or sell) an asset at a fixed price on a particular date in the future.
These are traded over the counter (not on an exchange).


2) Why would someone buy a Forward ?
If you have a commitment to buy something in the future you can buy a forward agreement that will lock in the price that you will have to pay.


3) What information do you need to price a Forward ?
Delivery Price - The price agreed to pay for the asset
Maturity Date - The date of delivery


4) Can you draw the payoff diagram for buying a Forward ?
payoff = (S - E)


5) How do you price a Forward ?
price = S - e-rtE


6) What is the difference between a Forward and a Future ?
A future is a standardised Forward contract that is traded on an exchange.
Forwards do not have to conform to the standards of a particular exchange.
A forward will always be cheaper than an equivalent future with identical characteristics because it introduces credit risk.
This credit risk is due to there being no clearing house and therefore no guarantee.



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